FOREX-US dollar rallies; Aussie hits five-year low after China tariff concerns

By Laura Matthews and Stefano Rebaudo

April 4 (Reuters) - The U.S. dollar rose against major currencies such as the euro and yen on Friday after Federal Reserve Chairman Jerome Powell acknowledged the repercussions of larger-than-expected U.S. tariffs and signaled a cautious tone on future easing.

Powell said tariffs increased the risk of higher inflation and slower growth, highlighting the difficult path ahead for policymakers at the U.S. central bank.

The Australian dollar, meanwhile, seen as a liquid proxy for the yuan, hit five-year lows against the greenback after China announced additional tariffs on U.S. goods on Friday.

"As investors await clarity on potential retaliatory measures and the Fed's response should inflation and growth concerns intensify, market pricing reflects expectations of four rate cuts this year, contrasting with the Fed's stance of patience," said Uto Shinohara, senior investment strategist at Mesirow Currency Management.

"The Fed has indicated it is too soon to make confident predictions and prefers to wait for uncertainty to subside. The dollar remained relatively stable during Powell's speech, reflective of the wait-and-see messaging throughout."

Powell's comments followed data earlier in the day showing that non-farm payrolls rose by 228,000 jobs last month after a downwardly revised 117,000 rise in February, well above the 135,000 forecast. The unemployment rate ticked up to 4.2% from 4.1%.

Still, markets drew little comfort from the numbers because "they don't factor in any of this week's events or the fallout that will inevitably come with them over the next few weeks," said Helen Given, director of trading, Monex USA.

As a preview of what might lie ahead for investors, China announced additional tariffs of 34% on all U.S. goods, starting April 10, the most serious response in a trade war with President Donald Trump. The move added to recession concerns and intensified a global stock market rout.

Having fallen below Thursday's close, the euro EUR=EBS was last down 0.69% at $1.10976, after jumping 1.8% - its biggest daily rise since November 2022 - as high as $1.1147 on Thursday, a level not seen since September 30.

Markets are predicting four quarter-point interest rate cuts from the Federal Reserve in the remainder of this year, and reduced the odds of further Bank of Japan tightening to 11 bps.

They also fully priced in three 25 basis point European Central Bank rate cuts by December EURESTECBM6X7=ICAP.

The dollar index =USD, a measure of the currency against a basket of six major peers, had plunged 1.9% on Thursday, its worst day since November 2022. It rose 0.71% to 102.72 in afternoon trading on Friday.

The Swiss Franc jumped 1.20% EURCHF= versus the euro and hit a 6-month high versus the dollar CHF=.

Meanwhile, sterling

Deutsche Bank warned on Thursday of the risk of a crisis of confidence in the U.S. dollar, saying major shifts in capital flow allocations could take over from currency fundamentals and spark disorderly currency moves.

As Chinese markets observed a national holiday on Friday, the dollar edged up 0.17% at 7.2943 yuan in offshore trade CNH=D3. On Thursday, it had leapt as much as 0.7% to a two-month high at 7.3485.

The Australian dollar AUD=D3, fell 4.86% to $0.60170, its lowest since early April 2020. Similarly, the New Zealand dollar NZD=D3 was down 3.81% to $0.55730.

The Canadian dollar CAD= dropped 0.79% to 1.4206, while the greenback pared losses against the yen, trading up 0.36% to 146.59 yen JPY=EBS. It slumped 2.2% in the prior session, at one point dipping as low as 145.19 yen for the first time since October 2.

China faces combined duties of some 64%, when also factoring in a tariff of 10% that Trump levied in his first presidential term. Both China and the EU vowed countermeasures, raising the risk of a broader trade war.